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How Does Japan Intervene in Currency Markets?

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Speculation that Japan may intervene to support its currency reignited repeatedly this year as the yen plunged to 24-year lows against the US dollar. In mid-September, the Bank of Japan was said to have conducted a so-called rate check, a move often considered a precursor for actual intervention. Days later, it did just that, stepping in to support the yen for the first time since 1998. A month later, it jumped in again. These were extraordinary moves for a country that’s long been criticized by trading partners for tolerating or even encouraging a weak yen to benefit its exporters.

1. Is there a certain level that triggers action?

While investors speculate about a “line in the sand” that the authorities are determined to defend, it’s never absolute. Authorities tend to talk more about containing excessive moves rather than defending specific levels. Top currency official Masato Kanda, who confirmed the September intervention, described the currency market’s shifts as having been sudden and one-sided. The government’s intervention on Oct. 21 came after the currency fell to a fresh 32-year low of 151.95. The first one, on Sept. 22, was after the yen breached 145 and continued to fall following the BOJ’s decision to maintain its ultralow rates. That brought it within striking distance of the 146.78 level that was reached before a joint Japan-US intervention to support the yen back in 1998.

Read more: Why the Yen Is So Weak and What That Means for Japan

2. What’s a rate check?

In past cases, the BOJ calls traders to ask about the price offer of the currency against the dollar. It’s a step short of an actual yen transaction, and is meant to serve as a warning for traders to avoid one-way bets. It usually happens when volatility increases and regular verbal warnings by ministers don’t have the desired effect. Before mid-September, the last reported rate check happened in 2016 as the yen surged. It kept rising despite that move and only retreated after the US Federal Reserve embarked on a series of rate hikes and the BOJ introduced yield curve control — a policy that aims to keep the yield on 10-year government bonds around at set level.

3. Who makes the call to intervene?

The finance ministry decides whether to intervene in the market and the Bank of Japan does the buying or selling. It’s usually preceded by a succession of carefully choreographed verbal warnings by officials. If they say the government isn’t ruling out any options, or that it’s ready to take decisive action, that’s usually meant to put markets on maximum alert that intervention may be imminent.

4. Where does the money come from?

When propping up the yen, the dollars come from Japan’s foreign currency reserves, which puts a limit on its firepower. At the end of August Japan had $1.17 trillion — more than it had at the time of the April 1998 intervention. That’s a ratio of 2.4 times the daily value of the currency market in Tokyo, compared with the 1.4 times buffer it had last time. However, a unilateral move is still seen as unlikely to succeed without US support. In September’s intervention, Japan spent almost $20 billion to limit the currency’s losses.

5. Is intervention a good idea?

While intervention is a clear way to tell speculators you won’t allow your currency to go into free fall, it’s only going to be a temporary fix unless economic fundamentals driving the trend are also addressed. In addition, foreign reserves are generally there to protect the economy in the event of a major financial shock or unexpected event, not to artificially prop up your currency.

6. Would Japan have to go it alone?

Most likely. It was able to secure Group of Seven support for intervention after the 2011 tsunami and during the Asian financial crisis. But things are different now. Its main partners generally don’t like countries to set or influence exchange rates and want market forces to do the work. The G-7 and Group of 20 — both of which include Japan — have agreements to that end in place. The yen’s current weakness is partly driven by a combination of continuing BOJ monetary stimulus and the Fed rate hikes. In that sense, it could be seen as a Japan-driven event, and that may weaken the case for action.

7. How do we know if the government intervened?

Sometimes the government announces it, as it has this year. In 2011, the finance minister summoned the press and announced the G-7’s coordinated intervention as it was happening. A sudden, long vertical line on a price graph can also signal that the BOJ has bought or sold, but sometimes those moves can be triggered by people panicking in the market. The Ministry of Finance releases intervention figures at the end of each month, even if it hasn’t done any buying or selling.

(Adds Oct. 21 intervention in introduction and first question, amount spent in September in question four.)

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